I only had two options expire today. The big one was on TLT where I have 10 TLT February $124 calls that will be assigned. I’ll be forced to sell 1,000 shares of TLT that I do not own at $124 while TLT finished the day at $131.01. My cost per share will be higher based on the $1.41 I received when I sold these calls at the end of November. I received $1,405.74 after commissions which means these calls finished deep in the money and I am nowhere close to making a profit yet.
I didn’t panic though. I hedged last week to block really big losses if interest rates fall further and then today I took the next step towards helping my probability of finishing with a profit. While TLT was trading at $130.97 this afternoon, I sold 10 TLT May $124 covered puts for $1.40 each and received $1,395.75 after paying $4.25 in commission. Technically, these were naked puts, but once the 1,000 shares are assigned to me after today’s close, they’ll be covered puts.
Adding the original $1,405.74 in premiums to today’s $1,395.75, I’ve taken in $2,801.49 or roughly $2.80 per share. This premium intake means my cost per share is up to $126.80. While still far away from being profitable, I expect TLT to drop back below $124 by the summer, if not well before then.
I’ll have to pay out the dividends that TLT pays since I’m short the shares, but these new put premiums will more than cover that expense and leave me with a solid profit while I wait for the share price to drop again. I won’t be making the same kinds or returns that I was making when I sold the naked calls, but based it’s still all gravy since these positions don’t affect my long allocations. I considered selling higher strike puts to push up my premiums, but decided to be patient and not miss out on the price drop if TLT falls below $124 before my puts’ expiration.
I was hoping I could sell a closer month expiration, but the math made it easy to push out a few months. The March $124 puts were trading for $0.20, not even enough to cover the $0.24-0.25 dividend I expect to pay on March 1. The April $124 puts were trading for $0.69 – better, but not as good as the May puts when divided by number of months I’ll have them. By selling for $1.40, it’s the equivalent of selling in each of the next three months for $0.467 each time. In my eyes, the uneven premium curve is due to the expectation that TLT won’t drop much in the next month or two, but has a decent shot of dropping by May. The strikes closer to the money didn’t have such a steep curve. Each month is roughly equal to the next month when divided by how many months remain.
Along with my TLT calls, I also had two FEZ February $37 covered calls. While FEZ finished today at $31.17, my calls had no chance of being assigned. I should’ve sold new covered calls, or even naked calls, when I realized these February $37 calls would expire worthless. I still need to sell new covered calls and tried to today, but my order didn’t hit yet. I was aiming for the February $33 strike and will revisit it next week to cut my losses a little.